The Stock Market Is Doing Something It Does Every 4 Years, but History Says It Signals a Big Move in 2025

The S&P 500 (SNPINDEX: ^GSPC) is widely regarded as the best gauge for the overall U.S. stock market. That's because it includes 500 large companies that span all 11 stock market sectors, representing approximately 80% of domestic equities by market value. That scope and diversity makes the index a bellwether for U.S. stocks.

The S&P 500 is currently doing something it does every four years: Reacting to the results of another U.S. presidential election. Most investors know election results can influence market sentiment, but what they might not realize is the S&P 500 has typically generated above-average returns during 12-month period following presidential elections, regardless of the results.

Read on to learn more.

History says the S&P 500 could advance 14% through November 2025

The chart below shows how the S&P 500 performed during the 12-month period following U.S. presidential elections during the last four decades. Importantly, presidential elections take place on the first Tuesday following the first Monday in November, so the returns shown in the chart use those Tuesdays as a starting point.

Data source: YCharts.

As show above, there have been 10 presidential elections in the last four decades, and the S&P 500 returned a median of 17% during the 12 months following those events. For context, the S&P 500 compounded at 9% annually over the entire 40-year period. That means the index has typically generated above-average returns during the 12-month period following presidential elections.

One plausible explanation for that outperformance is excitement about policy changes the winners of the presidential and congressional races discussed during their campaigns. Regardless, we can apply historical data to the current situation to make an educated guess about how the stock market may perform in the coming months.

At the time of writing, the S&P 500 had advanced a little more than 3% since the markets closed on Nov. 5, the day the presidential election took place. If its performance aligns with the historical median, the S&P 500 will return another 14% by November 2025. In other words, history says the stock market could continue climbing higher next year.

Interestingly, another data point supports that conclusion. While the S&P 500 was introduced in 1957, back-tested data from Goldman Sachs shows the index would have gained 16% annually during periods where Republicans controlled the presidency and both houses of Congress, as will be the case in 2025.

Image source: Getty Images.

The economy looks strong, but stock market valuations are concerning

No stock market indicator is perfect and every situation is unique. So, while history suggests the S&P 500 will generate robust returns in 2025, how the stock market actually performs will depend on macroeconomic fundamentals and valuations. Fortunately, several recent data points suggest the economy is in good shape.

• Strong consumer spending led to a 2.8% increase in gross domestic product (GDP) in the third quarter, above the 10-year average of 2.7%.
• Retail sales increased 2.6% in October. That was fastest increase since July and above the 12-month average of 2.3%.
• Unemployment remained stable at 4.1% in October, even though two hurricanes and the Boeing strike weighed on demand for labor.
• Consumer sentiment trended higher in November for the fourth consecutive month, reaching its highest level since April 2024.

Ultimately, a strong economy should translate into strong financial results. Indeed, Wall Street expects S&P 500 companies in aggregate to report earnings growth of 15% in 2025, an acceleration from the projected 12% growth in 2024, which itself is an acceleration from 1% growth in 2023. Strong corporate earnings could drive the stock market higher.

However, investors have already priced in at least some of that growth. The S&P 500 currently trades at 22 times forward earnings, a material premium to the 10-year average of 18.1 times forward earnings, according to FactSet Research. That means many stocks are expensive by historical standards.

Here's the bottom line: Investors should be cautiously optimistic about the coming year. History says the S&P 500 could soar in 2025, and the strong economy supports that idea. But elevated valuations could lead to a correction or even a bear market next year if S&P 500 companies fail to meet Wall Street's earnings estimates.

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Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends FactSet Research Systems and Goldman Sachs Group. The Motley Fool has a disclosure policy.